UBS upgrades Ormat (Industries) to “buy”

Alexander Richter 7 Jan 2009

Israel online business news service “Globes Online” reports, that “UBS has upgraded its rating on Ormat Industries Ltd. (TASE:ORMT) to “Buy” from “Neutral”, while keeping its price target at NIS 33. Ormat is focused on the development and supply of geothermal energy, a renewable source of energy that is derived from underground resources of steam and heated liquid.

UBS observes that over the past three months Ormat has shed nearly 40% of its market value, underperforming benchmark indices and attributes the share weakness to financing concerns and sliding oil prices. UBS thinks the correction in Ormat share price is overdone at current levels.

Ormat is currently trading at an uncharacteristic 22% discount to its NAV, which UBS believes creates an attractive entry point. The investment bank notes that Ormat is not a typical holding company and has traded historically around par with its traded NAV.

UBS continues believes that geothermal energy offers substantial long-term potential and is encouraged by the extension of the production tax credit and favorable regulatory backdrop. As the only vertically integrated player with proven experience and pipeline of projects, UBS feels Ormat is well placed to capitalize on the geothermal potential.

Looking at 2009, UBS expects the main catalysts to be the company’s ability to finalize pending financing agreements and oil price momentum. Ormat is negotiating three financing agreements totaling $250-300 million, which should support its capital expenditure plans. UBS does not rule out a possible delay in new projects, should financing terms not coincide with the company’s internal rate of return criteria, but notes that the pending financing is backed by up-and-running projects, which makes it more accessible, and the company is well capitalized.

Regarding financing UBS says that contrary to other levered companies, Ormat is not dependent on one or two sources of financing and has been pursuing various avenues including bank loans, lines of credit, project finance, tax monetization, and different equity mechanisms. In order to support its pipeline of projects for the coming years, which includes additional capacity of 69MW in 2009 and 150-200MW in the following two years, Ormat faces capital expenditure requirements of $484 million, of which $286 million is for new projects in 2009.

Looking at the company’s sources, UBS says that Ormat has unused credit lines of $310 million, cash balance of $38 million, and expected cash from operations of $124 million in 2009.”

Source: globes.co.il